54 Pages Posted: 4 Dec 2015 Last revised: 25 Aug 2018
Date Written: August 23, 2018
We document that managerial optimism spreads across firms along supply chains. Supporting a causal interpretation, we show that beliefs trickle up the supply chain, not down, and that biases in supplier forecasts are only affected by customer forecasts issued before, not after, the supplier's forecast. We further find that bias propagation increases when suppliers have less confidence in their own views and when the perceived precision and importance of customer forecasts increase. Optimism causes changes in the corporate policies of suppliers, suggesting that contagious sentiment in production networks contributes to fluctuations of business and financing cycles.
Keywords: Managerial optimism, Bias propagation, Expectation formation, Production networks
JEL Classification: G4, D8, D9, G3, D2
Suggested Citation: Suggested Citation